Uncovering investment candidates using financial analysis. Making sense of the myriad of financial data and turning it into actionable information.

Tuesday, May 1, 2012

Investment Analysis: Capital Expenditure

It's been longer than anticipated between posts. I got busy with other things, particularly the launch of our new alpha calculator. We'll take advantage of it once this analysis is complete and the best investing option (if any) becomes apparent. I'm also going to dedicate a post to describing the alpha calculator (which I debated calling the "alphalator" when I was feeling rather silly) once we get further down the road on this analysis.

This next factor is similar to the R&D calculation and seeks to uncover the same kind of information - how much is the company investing in staying competitive?

Capital expenditures have the potential of making the company more productive and so we consider it a good thing when these are greater than the industry average. Another reason is that investment in capital items can indicate management confidence in future earnings.

I'm going to use the capital expenditures line item from the cash flow statement. I think it is a nice, tidy alternative to figuring out the numbers from the balance sheet and getting involved in the non-cash, highly subjective area of amortization.

For those of you not familiar with cash flow statements, a negative number demonstrates cash out of the company, whereas a positive number indicates cash into the company. This number should usually be negative; if it was positive it would indicate that the company was liquifying its assets.